The Endless Greek Drama

 The reasons for a choice painful on the political level as well as on the human one.

I do not know when Tsipras has understood that the intention of Schauble was to push Greece out of the euro-zone (at least); then he certainly understood that the choice was between preparing Grexit or accept Germany’s blackmail. At the risk of a break with the left of Siriza, and with the support of the center-right opposition, he chose to undergo a further dose of austerity (against whom he had fought to win the elections). The argument, which states that on July 12 he obtained loans ten times greater than that Merkel had offered him two weeks before, and that he had refused, is obviously weak.

What are the reasons for a choice that certainly was painful on the political level as well as on the human one? I put in first place the problem of the current account balance. Which, starting from levels of deficit in excess of ten points of GDP, had arrived in 2014 almost to a break-even. However, the adjustment of the trade balance, with exports (59 billion), slightly lower than imports (63.3 billion) was earned, over six years, with a slight increase in exports (+ 4.2%) and a sharp drop in imports (-39%), obviously due to the collapse of a quarter of GDP. Since the possibility of a return to the drachma make sense from the perspective of establishing a robust recovery of GDP, it is very likely that at least initially, but probably for many years, the current account goes in red, and that therefore it is necessary to get capital to balance the bill.

The problem is then to where to find the money, since the Grexit implies default on loans from the IMF, the European fund EFSF and also of bilateral loans granted by some European governments. Most likely the government would avoid making Greek default on loans toward private hands (particularly Edge fund), but it is very unlikely that he could find the necessary capital at acceptable costs.

Of course there are sovereign states that have accumulated tremendous amounts of capital, and our thoughts go obviously to China, but, and here I turn to the second point, by Xi Jinping came advice to stay in the euro, for reasons easy to understand (diplomatic relationship with Germany), a part of the interest of China to a port (Piraeus) which can set up a great maritime hub for the whole of Central and Eastern Europe. In addition to the Chinese leader, the same advice come to Tsipras from Obama and Putin.

Third but not least, the attitude of the overwhelming majority of Greek citizens is in favour of remaining in the euro-area. Clearly those who voted Yes (Nai) didn’t like austerity, but the vote was just to indicate a choice in favour of the euro; but a good deal, probably a half of those who voted No (Oxi), rejected the austerity made in Germany but did not want a Grexit. Therefore, a sudden return to the drachma, which still involves a period of immediate extension of banks closure, rationing of gasoline and other goods, a worsening of the hunt to safe havens (already in place), would have resulted in a very difficult political climate, and Tsipras would have to deal with the hostility of the administration, including the Central Bank.

However Tsipras should keep in mind that the prospect of Grexit is still there. The conditions imposed by the new Memorandum of Understanding (MoU) will lead to a reply of what happened the previous years. The MoU indeed returns exactly the same requests (e.g. on VAT and pensions) that had already been made to the government of Samaras in 2014. Despite the promise of easing the fiscal tightening at a time when Greece was back to a primary surplus, the Troika had insisted on further measures that Samaras had postponed (at least let me do before the elections!). In top of these measures there are others really incredible, like the fund of a 50 billion as guarantee. Fund to be set up with privatization, managing in times inevitably short to do what the government Samaras had failed to do in more than four years. In addition it is not clear what will be the terms of the debt restructuring (the word default is taboo), those of further extension of the grace period, and reduction of the interest rate.

Merkel and Schauble should be grateful to Karamanlis, the leader of the right party in charge in the first decade of 2000, who realized the concealment of deficits. It 'was precisely the revelation (Papandreou) of hidden deficit that has allowed Germany to charge the accusation of fiscal irresponsibility to PIIGS countries, arguing that this was the cause of the sovereign debt crisis. In fact, apart from the Greek case, in other countries it is exactly the other way round: the financial crisis blew up public debts. Crisis began, as is known, in the US, but then involved all over the world; in Ireland for over-indebtedness of the banks, in Spain for a housing bubble. The only country with a high debt was Italy, but until 2007 it had been reduced by more than twenty points, reaching 103% of GDP, and the deficit was still under control. 

Within a period not longer than a couple of years, Greece will be left with an economy still depressed and unable to meet the conditions set by the MoU. The "catharsis" of Aristotle, which conclusion of the drama, is yet to come.

Ruggero Paladini

Economist - Professor of "Scienza delle Finanze" at University "La Sapienza" Roma; Member of the Economic Board of Insight -